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What to consider when choosing an investment

ITIPress.org - Raul Lopez / Industrial Engineer MBA

Globalization and integration of the financial markets bring some very interesting opportunities to investors. However, there is a growing demand of education to understand the instruments and dozens of new markets. Despite of the opportunities, the basic principles of investing in order to choose where to invest did not change at all.

First of all, the investor has to know his/her objectives, which lead him to the decision to invest. After all, the needs of a person who wants to buy a car in the foreseeable future are different from those of a family, which saves for their children’s education or retirement. For the first it is probably very important to preserve the principal against losses thus sacrificing to a certain extent possible higher returns, whereas the second, which obviously has a longer time limit, probably will take higher risks, because he has more time to recover from a possible short term loss. It is important to remember that return and risk are negatively correlated. It is usually the higher the return the higher the risk and viceversa. 

The investor’s risk aversion is another important factor to consider. People are different (up to now). So people have different risk aversions and one has to be clear about his own preferences to take risks or consult financial advisers to find out what type of investments are convenient for them to determine one’s asset allocation.

Diversification consists in distributing available assets among different types of investments, different sectors and last but not least different countries and currencies. Diversification guarantees elimination of nonsystematic risks of one’s portfolio. For small investors mutual funds give a good level of diversification, which some time ago was only available for big investors and institutional investors.

Concerning the return, it is important to remember that it is also affected by taxes on capital gains and dividends. It is thus necessary to know how the net return can be affected by taxes which are particular to every individual investor.

“Experience is not what happens to a man. It is what a man does with what happens to him.” Aldous Leonard Huxley

 

 

 

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